Scenario 4: Definition of a Liability
CON 6 includes the following guidance defining liabilities.
Liabilities
35. Liabilities are probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities
in the future as a result of past transactions or events.
Characteristics of Liabilities
36. A liability has three essential characteristics: (a) it embodies a present duty or
responsibility to one or more other entities that entails settlement by probable
future transfer or use of assets at a specified or determinable date, on occurrence
of a specified event, or on demand, (b) the duty or responsibility obligates a particular
entity, leaving it little or no discretion to avoid the future sacrifice, and (c)
the transaction or other event obligating the entity has already happened. Liabilities
commonly have other features that help identify them—for example, most liabilities
require the obligated entity to pay cash to one or more identified other entities and
are legally enforceable. However, those features are not essential characteristics of
liabilities. Their absence, by itself, is not sufficient to preclude an item’s qualifying
as a liability. That is, liabilities may not require an entity to pay cash but to convey
other assets, to provide or stand ready to provide services, or to use assets. And the
identity of the recipient need not be known to the obligated entity before the time
of settlement. Similarly, although most liabilities rest generally on a foundation of
legal rights and duties, existence of a legally enforceable claim is not a prerequisite
for an obligation to qualify as a liability if for other reasons the entity has the
duty or responsibility to pay cash, to transfer other assets, or to provide services to
another entity. [Footnotes omitted]
Scenario 4: Consider the following case excerpt from the FASB’s discussion materials related to
the existing CON 6 liability definition:
Suppose a hospital has carried out a routine operation during which the patient died. If the
patient’s death was the result of hospital negligence, it is highly probable the hospital will
have to pay compensation to the patient’s dependents. The cause of death has not been
established.
. . . Is a present obligation created when:
a. the hospital determines it has been negligent?
b. the executors of the patient’s estate assert negligence occurred?
c. a court concludes that negligence has occurred?
4. Analyze this issue
Liabilities square measure such
obligations concerning business that square measure needed to be
paid regardless of however.
Based on fundamental measure, liabilities square measure of 2 sorts
:
Short-term
Long-term
So, it will be same that liability could be a probable future
sacrifice of economic edges (assets) arising from gift obligations
of a selected entity to transfer assets or offer services to
alternative entities within the future as a results of past
transactions or events.
"Providing services" creates liabilities means that whereas closing
the business, the business have numerous transactions that square
measure out of providing services.
It means whereas providing services to alternative entities, the
corporate uses numerous resources, that square measure to be paid
and creates liabilities.
So overall providing any services to anyone invariably creates
liabilities.
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